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Microsoft made a splashy investment announcement this week. And no, we aren't referring to the OpenAI deal.
Microsoft and Darwinbox announced a strategic partnership this week in a three-pronged deal that includes:
Microsoft has been on an MBA business case-worthy hot streak the last few years, with Satya Nadella rapidly becoming one of the most successful and admired CEOs in the world.
When Nadella took over in 2014, Microsoft was facing significant headwinds from younger technology companies like Google, Dropbox and Box - who were cutting into their market leadership as an enterprise service provider and best friend to CTOs.
During his tenure, Nadella has placed a number of strategic bets on two of the three major enterprise software verticals: customer relationship management (CRM), enterprise resource planning (ERP), and human resources information systems (HRIS).
On the CRM side, Microsoft acquired legacy CRM platforms and used that market expertise to launch Dynamics CRM. Dynamics was then integrated with other Microsoft products, such as Office 365 and LinkedIn, to create a powerful, integrated solution for sales, marketing, and customer service.
Microsoft also invested heavily in Dynamics 365, a cloud-based ERP platform that integrates with other Microsoft products, such as Office 365 and LinkedIn, to provide businesses with a comprehensive solution for managing their financials, operations, and customer data.
However, on the HRIS side of their business, Microsoft had been nibbling at the edges without actually jumping in to the heart of the industry. They made the LinkedIn acquisition which gave them some recruitment capabilities, and they rolled out Viva and Teams which created more workplace collaboration.
Despite those efforts, it looked like Microsoft didn't want to get fully into the messy HRIS business of compliance, labor laws, payroll processing and tax filings - instead, content to let Workday, ADP, SAP and Oracle own that vertical.
This is what makes the Darwinbox partnership announcement so significant. HRIS was the glaring gap in Microsoft's quest to own the entire enterprise workspace, and now that gap can start to get filled by this partnership.
And it's not just that it made sense for Microsoft to make any HRIS bet, it's that this particular HRIS bet is one that could be especially fruitful.
The enterprise HRIS industry simply doesn't see a lot of new entrants to the market very often. Workday - the sexy, tech-friendly, market leader - was founded two years before the iPhone. SuccessFactors - SAP's HRIS platform - has been in the market for 22 years.
These solutions are still dominant players with large moats because of just how complicated enterprise HR management can be, but their ability to be truly cutting edge is hindered by their age and the technology infrastructure that they're built on.
By betting on Darwinbox, a platform that was founded in 2015, Microsoft has hitched their HRIS wagon to a company that is better set-up for success in the new world of work and a platform that is built on the most modern principles of interoperability, no-code automation and AI-powered recommendations.
Darwinbox still needs to prove themselves in the North American market, especially with the complex web of US payroll, labor and tax regulations, but they're looking like the most promising enterprise solution to enter this market in a decade, so you can understand why Satya sees this as Microsoft's best opportunity to fill their HRIS gap.
While Darwinbox has received high praise from analysts and industry insiders, they are still a relative unknown in the massive North American HRIS market.
The partnership with Microsoft gives Darwinbox immediate credibility to say that "We are the only HRIS that Microsoft has ever invested in." Beyond that credibility, it appears that there will be cross-selling opportunities available to Darwinbox that can take advantage of the deep relationships Microsoft has already developed with enterprise software buyers.
There is no shortage of CTOs and IT leaders who want their entire business operations to be run through Microsoft. We often hear this in customer engagements when buyers say "We also want to look at Microsoft's HRIS."
The problem has been that there really isn't a "Microsoft HRIS" to look at. Sure, Viva has some talent management features and Dynamics can do a little bit of HR reporting, but these are not true HRIS platforms and those solutions quickly lose out to more robust, established HRIS competitors.
Now, Darwinbox can be the preferred answer when CTOs ask for the "Microsoft HRIS", which gives the IT leadership the consistency they look for in their systems, without shortchanging the functional capabilities that the HR team needs too.
Beyond the credibility and cross-selling opportunities, I believe this partnership also gives Darwinbox the ability to narrow their focus in the coming years.
As we've seen with Workday, once a company finds success in the enterprise HRIS space, it can be tempting to start moving into new verticals (ERP/Financials in Workday's case). While Workday has had some initial success with their Financials products, this shift in focus has led to an abandonment of their core audience: HR professionals.
As Workday's brand, marketing and innovation moves from CHROs to CFOs, the area that was once their greatest strength (HR) is starting to become more vulnerable.
This is pure speculation on my part, but this partnership could allow Darwinbox to avoid the temptation of entering new verticals, since they can refer Dynamics products in, instead. And if this partnership allows them to stay focused on HR and the employee experience, the partnership could give them an even higher likelihood of making a large dent in the enterprise HRIS space.
